After the Fed’s latest zero-rate promise pushed gold back to the financial front pages, it’s worth asking who’s buying in bulk, and why?

There’s plenty of noise, for instance, about Chinese households buying gold during last week’s New Year holidays.

Away from the massed decisions of private investors and savers, gold holdings amongst the world’s central banks have quietly risen to a six-year high, according to data compiled by the International Monetary Fund.

“There’s a perception perhaps that gold is no longer a crucial part of the financial system in the way that it was under the gold standard before 1970, 1971,” as Marcus Grubb of the World Gold Council put it in an interview last week. “But in fact that’s not really true because even with the ending of the gold standard, gold remains as an asset held by the world’s central banks.”

A good chunk of this weaving is due to official reserves. As our chart shows, central banks control a shrinking proportion of what’s been mined from the ground. A far greater tonnage of gold again is finding its way into private ownership, and it’s having a greater still impact on how money and finance work.

First, private individuals have led the rediscovery of gold bullion as a financial asset, rather than the decorative store-of-value it had become by the close of the 20th century. Institutional finance has caught up, however, and gold is now in front of the Basel Committee on global banking, proposed as a “core asset” for banks to hold and count as a Tier 1 holding for their liquidity requirements.

Turkey’s regulators already acknowledged physical gold as a Tier 1 asset for its commercial banks starting in November, with the cap of 10% worth some 5.5 billion lira ($2.9bn) according to Dow Jones. Also, a growing number of investment exchanges, meantime, as well as prime brokers, now accept gold as collateral, posted as downpayment by institutions against their commodity and other leveraged positions. Just on Friday, London market-maker Deutsche Bankwas added to the CME’s list of approved gold custodians.

Gold pays no interest of course. But in our zero-yielding world, that only puts it ahead of where the capital markets are being herded by central-bank policy anyway. Nor does gold have much industrial use (some 11% of global demand in the 5 years to 2011), a fact which highlights its unique “store of value” attributes. Being physical property, gold is no one else’s debt to repay or default.

Being globally traded, it’s deeply liquid and instantly priced. Turnover in London’s bullion market, center of the world’s gold trade, is greater at $240 billlion per day than all but the four most heavily traded currency pairs worldwide.

And being both rare and indestructible, it couldn’t be any less like “money” today.

Scarcely a lifetime ago, gold underpinned the globe’s entire monetary system. Outside China, which tried sticking with silver, the compromised and then bastardized gold standard which followed first World War I and then World War II still saw the value of central-bank gold reserves vastly outweigh the paper obligations which those banks gave to each other.

Even three decades ago, 10 years after the collapse of what passed for a gold standard post-war, central-bank gold holdings still totaled some three times central-bank money reserves by value. Look at the decade just gone – the 10 years in which gold investment beat every other store of value hands down. Pretty much every currency you can name lost 85% of its value in gold. Yet the sheer quantity of new money pouring into central-bank vaults saw their gold holdings only just hold their ground.

Gold’s rise, in short, has been buried under wood-pulp. To recover its share of central-bank holdings as recently as 1995 would now require a further doubling in value. To get back to the 1980s average would require a 15-fold increase. Or, alternatively, a 93% drop in the value of foreign currency reserves relative to central-bank bullion holdings.

Such a trend is not yet in train, neither on the charts nor the fundamentals. The US Dollar remains the biggest reserve currency, weighing in at 62% of stated reserves according to IMF data, down from its peak above 71% in 2001 but more than equal to its share in the mid-1990s. Even so, as former FT columnist and current ButtonWood at The Economist Philip Coggan writes in his latest book, Paper Promises:

“If Britain set the terms of the gold standard, and America set the terms of Bretton Woods [in 1944], then the terms of the next financial system are likely to be set by the world’s biggest creditor, China. And that system may look a lot different to the one we have become used to over the last 30 years.”

Coggan rightly notes that China isn’t the only large creditor, and nor does it hold anything like the dominance which the U.S. held at the end of World War II. Whether this switch starts today or only starts to show 10 years from now, the risk of such a change of direction can hardly be discounted to zero.

Repudiation of government debt, the form which most foreign currency reserves take, will only begin with the Greek bond agreement, perhaps leading first to a rise in U.S. dollar holdings but also highlighting the ultimate risk of holding paper promises. And that fear, of having to write off money thanks to default or devaluation, is clearly driving the rise in gold demand from central banks already.

Gold prices climbed Thursday to levels last seen in early December, extending a rally triggered as the Federal Reserve pledged to hold US interest rates near zero until the end of 2014.

Gold for February delivery, having risen almost $25 yesterday on the news, now fetches $1,725 an ounce. And this, just when investors had begun to abandon the barbarous relic, to question its motives. But that was their mistake. Gold may go up. It may go down. But it has no motives. It is no man’s liability. Instead, it simply holds a mirror up to its government-issued competition. It is, itself, just a dumb lump of metal. But even so…it frequently appears the brighter, smarter choice — in relative terms — to the buffoons in the mirror.

Should we be surprised?

So Mr. Bernanke is fiddling the levers again, promising to keep rates lower than a sea snake’s belly until 2014. He might have just taken out an ad in the front page of the paper:

“Fed to Savers: Go to Hell!”

America’s #1 central banker may well be highly intelligent…but that does not preclude him from also being a dunce. Probably, it depends on the subject at hand. Maybe he’s a talented cowboy, for example. Or perhaps he is a whizz at the Times’ crossword. Either way, we wish he’d dedicate more of his time to words and herds because, as a central banker, he’s either a fool, a knave…or both.

This is a man, let us not forget, who proclaimed…

In 2005, on the question of a speculative bubble building in housing as a result of cheap credit, that “these price increases largely reflect strong economic fundamentals.”

In 2007, as the market started to turn, “we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

In January of 2008, two months before the nationalization of GSEs Fannie Mae and Freddie Mac, “They will make it through the storm.”

And in June of 2009 that, “The Federal Reserve will not monetize the debt.”

And now, despite all evidence to the contrary, Mr. Bernanke thinks he can pull the economy out of the very mess into which he helped to steer it. He thinks he can deliver prosperity to a nation by punishing savers and inducing malinvestment — gross capital misallocation — on a scale so grand that die-hard proponents of Social (In)Security must be starting to blush.

Bernanke’s commitment to holding interest rates “exceptionally low” for an “extended period,” reeks of exactly the kind of insanity required to double down on a bad bet, of repeating the same experiment and expecting a different result. Combined with his “relapse into QE3, Euro-style,” which Eric Fry highlighted in yesterday’s issue “Gentlemen, Start Your Printing Presses!”, dollar-holders (and metal holders) ought to expect more of the same.

Critics, amazingly enough, still wonder when the man will ever learn. Never, is our guess. For one thing, his incentive for denial is simply too great. What do we mean by that? Glad you asked…

Imagine someone’s whole existence, his entire life’s work, is somehow built on a false grasp of reality, a radically skewed first principle. Imagine, for example, he is an internationally respected professor of alchemy. Or a world renowned proponent of the “stalk theory” of conception. Or…a central banker who believes he can know the impossible…the minds, the desires and the needs, of the millions who make up the market over which he imagines himself to lord.

For a while, luck, coincidence and the arc of history appear to be on his side. As his life goes along, our hapless hero is awarded greater and greater accolades for his misbegotten theories and crackpot ideas. He is gifted the highest seat in the land. The adoration of friends and peers. TIME Magazine’s “Man of the Year.” Eventually, he comes to believe in the delusion he has created. It becomes his reason for being, his raison d’etre. Deeper and deeper he becomes convinced in his own ability to perform the impossible.

One can see that our hero, sadly mistaken as he is, has every incentive to deny reality when (especially when) it is presented to him facts and all. Tell the alchemist he cannot alter the properties of led and his world, as he knows it, as it comforts him at night, begins to crumble. Likewise for our birdbrained OBGYN.

So let the evidence against Mr. Bernanke’s understanding of reality mount. As it will continue to do. We don’t imagine this man, whose entire reputation, whose entire career, rests on a false reality, is going to suddenly about-face anytime soon. He has every incentive to deny the facts, to look the other way.

Of course, it’s easy to deny reality. Not so easy, as Ayn Rand once quipped, to deny the consequences of denying reality. They will come due soon enough, Fellow Reckoner…and then, as Bill Bonner likes to say, all the Fed’s horses and all Obama’s men won’t be able to put Mr. Bernanke’s economy back together…ever again.

In two related stories in the final weeks of 2011 the WSJ took a couple of shots at gold buyers essentially taunting them as dooms-day conspiracy theorists akin to Ted Kaczynski. They reported on golds performance against T-bills one of the few areas out side of individual stocks that gold actually underperformed. Then followed it up on the last day of the year with another similar story how the Dow tied gold in performance for 2011.

All of this is true. While they did gloss over the decade long gains in gold over 540% since 2002. They never made the correlation that this far outperformed the Dow by a factor of 10 & T-bills are barely above record lows. T-bills are still near historic lows reached in the first quarter of 2011.

So the real story? Due to declines in the markets over the previous 5 years compounded with the two debt crisis in the US & Europe gold out-perform on an annual basis until this year. Gold will continue to act as liquidity in times of crisis when wall street needs to cover margins & losses. It should also be a portion of a fully diversified portfolio,conservatively 10% to an aggressive %20 of your net portfolio. Even the 1% use gold as financial insurance to cover during the worst of financial crisis’s like they did in 2009. Don’t be caught with out gold protecting your investments & providing much needed liquidity in times of economic trouble.

Published: Wednesday, 18 Jan 2012 | 4:55 PM ET

Gold ended last year in violent fashion, dropping 21 percent in less than three months. The sudden move, coming as equities rebounded in December, raised doubts among many investors about the sustainability of a trade that has been a winner for 10 years.

But these kinds of moves are simply par for the course, said the long-term gold bulls. It’s just a way of shaking out the weaker and more speculative investors that pile into the metal for a short-term trade, they said.

After bottoming on the final day of 2011, gold is back at it again, up five percent in the new year, compared to a 3.9 percent return for the S&P 500 index. Despite the volatile ending, gold finished up 2011 by 10 percent, while the benchmark for U.S. equities was virtually unchanged.

“In my view, gold is still very much in a super bull market,” said Alan Newman, who’s made his clients money for a long time by recommending the metal in his CrossCurrents newsletter. “Last year’s activity was quite normal for a super bull market, in which corrections are supposed to be scary.”

Gold fell 8 percent in January 2011. The metal plummeted 12 percent in two weeks at the end of 2009.

“Such corrective price movements have been evident throughout the 2001-2011 bull market, especially since the acceleration in the uptrend from 2009,” according to a Morgan Stanley research note to clients Tuesday.

“Moreover, the timing of the sell-off, especially to the sell-off low in late December, suggests strong selling pressure linked to year-end book squaring, portfolio adjustments and commodity index reweighting.”

Gold’s drop at the end of the last year also came amid a string of strong domestic economic data. If the economy, and subsequently the stock market, can recover on their own merits through rising employment and capital investment, then that could spell the true end to the gold bull market, investors said.

But many bullion bulls doubt that can happen, especially with the European Union now having to print their way out their own financial crisis this year. For the last 10 years, they’ve been right.

“The balance sheets of the Federal Reserve and ECB have never been greater and both will continue to increase in size,” said Peter Boockvar of Miller Tabak. “The Bank of Japan, the Bank of England and the Swiss National Bank continue to print large amounts of money. As long as ‘print and inflate’ is policy this bull market in gold will continue.”

Published: Tuesday, 17 Jan 2012 | 8:03 PM ET

By: Jack Farchy in London

Central banks increased the amount of gold they lent for the first time in a decade in 2011, as they used their bullion reserves to help commercial banks raise US dollars.

Although central banks hold one-sixth of all the gold [XAU= 1647.66 -3.53 (-0.21%) ] ever mined in their reserves, their activities in the bullion market are opaque, with not a single institution revealing its day-to-day operations. In addition to holding gold for their reserves, some central banks also trade the metal, lending it on the open market in order to obtain a yield.

Thomson Reuters GFMS, the precious metal consultancy that publishes benchmark statistics on the gold market, on Tuesday said that the quantity of gold lent by central banks had risen last year for the first time since 2000.

The estimate by GFMS confirms a trend that bankers and gold traders have been privately discussing for the past six months. The increase in lending came as eurozone commercial banks, suffering a shortage of dollar liquidity, rushed to borrow gold from central banks and later swap it on the market in exchange for dollars.

“There is growing evidence that short-term loans from some central banks to commercial banks could well have increased considerably [in 2011], with the latter then using gold to swap for US dollars,” GFMS said.

As the squeeze in the dollar [.DXY 80.65 -0.52 (-0.65%) ] funding markets intensified, short-term interest rates for lending gold fell to record lows in late 2011. The rate for lending gold for one month fell to -0.57 percent in early December, implying that a bank would have to pay to swap it for dollars.

The rush among eurozone commercial banks to lend gold was one of the clearest signs of the “dash for cash” late last year that weighed on the bullion price.

Goldman Sachs said in a report that “the downward pressure from European bank funding issues has left gold prices at a steep discount to the levels suggested by US [real interest rates]”. The metal tumbled 20 percent from a peak above $1,900 a troy ounce in September to a low of $1,522 in December. On Tuesday, gold was trading at a five-week peak of $1,663.

The increase in gold lending by central banks has brought an end to a decade-long decline in the amount of bullion out on loan, as falls in hedging by gold miners reduced demand to borrow the metal.

GFMS did not put a number on the increase last year, saying only that lending had risen “by a small amount”. It estimates that the outstanding volume of swapped or leased gold stood at 700 tonnes at the end of 2010, down from a peak of about 5,000 tonnes in 2000.

Philip Klapwijk, head of metals analytics at the consultancy, was skeptical that the lending activity had affected the gold price. “This is a purely financial swap of gold for US dollars; it shouldn’t have an impact on price,” he said.

Nonetheless, GFMS maintained a cautious outlook for gold prices in the near term, predicting that the metal would average $1,640 in the first half of 2012.

“A huge amount of gold needs to be taken out of the market day in, day out by investors,” Mr. Klapwijk said. “I’d be astounded if we see a reversal of sentiment but it may be that investment simply underperforms our expectations and prices sag.”

All the same, GFMS predicted that gold prices would once again gather steam later this year, touching a peak “just over the $2,000 mark” in late 2012 or early 2013.

Published: Wednesday, 11 Jan 2012 | 8:47 AM ET

Gold is investors’ favorite asset for 2012, and developed markets are preferred over emerging markets when it comes to putting money in stocks or bonds, according to a poll carried out by Japanese investment bank Nomura.

Of the 164 investors who took part in Nomura’s poll, 19.5 percent said they would choose to buy gold and hold it until the end of the year. Other favored assets were stocks and investment-grade corporate bonds in developed markets, with about 13 percent of responses.

Around 60 percent of the respondents said one or more countries will leave the euro currency in 2012, with a majority of them believing that only Greece, and no other country, will leave the currency.

February, March, April and May were mentioned as months in which investors see yield spreads for bonds of periphery euro zone countries reaching their peak versus Bund yields, according to the survey.

The most popular choice for investors was March, with nearly 20 percent of the votes, followed by April, with around 16 percent and February and May with more than 10 percent.

For 10-year US Treasurys, respondents on average predicted a yield of 2.21 percent for the end of the year, a bit higher than the current one, which is hovering around 1.98 percent.

Asked whether the Federal Reserve is likely to embark upon a third round of quantitative easing, two-thirds said that the Fed will do so, but most see it as an event for the second or third quarter rather than sooner, the poll showed.

Investing |1/06/2012 @ 9:02AM |3,292 views

The traditional, institutional analysts will say, “I don’t understand gold. Why would anyone buy gold?” You have to understand the motivation: an investment in gold is long term. It locks up the money. The commission or management fee is much better for stocks that are traded. Many analysts have an axe to grind.

Every correction in gold is usually pronounced as the start of the “big gold bear market.” We have disagreed with that for the past 10 years. In fact, the most recent correction even turned many of the bulls bearish, while our technical indicators gave positive buy signals.

If you are skeptical about the long-term bullish case for gold, please consider this: A study by Stephen Cecchetti and his team at the Bank for International Settlements (BIS), which is often called the “Central Bank for Central Bankers,” concluded:

“The debt problems facing advanced economies are even worse than we thought.

“The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.

“Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.”

In my opinion, the compounding interest on this debt is even more ominous than the actual level. There is no way that this debt will ever be reduced. Remember, much of this debt was accumulated during the boom years when tax receipts were very high. Now we will be in long period of stagnation or worse, possibly lasting 10-15 years or until the next big war. That means tax revenues will be on a long-term decline even as tax rates rise. The debt levels will grow exponentially.

Trillions of sovereign debt, private debt, and bank debt have to be refinanced. Where will that money come from? The printing press, or with today’s technology, “cyber-money.” There is no other way out. And that will make gold the only true money that will hold its value.

Sometime in the future, there could actually be a gold shortage. This is not unrealistic. All the major mining companies say that it is becoming very difficult to find new deposits. CNBC had a great report on the South African mines. They sent one of their top people, Bob Pisani, to do a report. He went 2 km down into a mine where the air-conditioned temperature is 100° F. Without air conditioning, it would be 130°. It was a fascinating report about the mining, refining, and then the ETFs.

Some of the South African mines are as deep as 4 km. Gold mines in other parts of the world, like Latin America, are facing dangers of being expropriated by their local governments. That dampens the enthusiasm of foreign mining firms to invest huge sums in new mines. It takes up to 10 years to get a new mine into production. If you are ever tempted to go into one of the penny stock gold exploration firms, just ask them, where will they get the tens of millions of dollars required to go into production?

In the meantime, the gold purchases by people in India and China are soaring. These two countries are 52% of all gold demand right now, vs. just 25% a few years ago.

And in the western world, the gold-holdings of the ETFs are locking up gold supplies. For example, the SPDR Gold Shares (GLD) now holds 1,200 tons of gold, stored in England. The more the buying of GLD and other ETFs increases, the more gold will be taken off of the market, i.e., the shortages increase. Secured storage facilities are running out of space. New facilities are hurriedly being built.

We are now at the point in the long term cycle where institutions are just starting to consider gold an “investable” asset worthy of their portfolios. All the other areas of the stock markets are no so closely correlated that it doesn’t matter which sector you hold.

We are still in the earlier phases of the gold bull market. In 1981, my firm predicted a 20-year bear market in gold (bottom in 2001) and then said that this would be followed by a 30-year bull market according to our cycle studies. The start of the current gold bull market was in 2001, exactly 20 years later. If my 30-year bull market cycle comes true, then there is quite a bit of excitement still ahead.

What could possibly cause that? In 1981 when we made the 30 year bull market forecast, we said we didn’t know what would cause it. Now we know: unprecedented and unsustainable debt levels of governments around the globe and a threatened implosion of the debt pyramids. The power of compounding of governmental debt alone will continue to increase that debt. It will require ever more money-creation just to service the debt. Taxes alone cannot do it. Big tax hikes will only worsen the debt problem. Compound­ing at any rate, even at 1%, is unsustainable over time. Just try it on your HP calculator.